Why Bankers Should Pay Attention to Wearables

The first time Disney dabbled in "wearables," it used a film about a glass slipper to shake off a post-World War II business malaise that left the company on the verge of bankruptcy. It worked like magic.

Now Disney is gaining impressive traction with a real-world accessory that people can slip onto their wrists to open up a whole new way of accessing and using money without a wallet, mobile phone or money clip.

Disney's MagicBand offers a lesson for the financial services industry in what it reveals about consumer appetite for easy automated payments and access to services.

Consumers use the MagicBand to pay for rides and other attractions at Disney theme parks, access affiliated hotel rooms and perform other functions. The bands use a digital token to identify the user and do not store card accounts. They also access Disney's Fastpass, a system that's designed to skip lines at attractions by setting reservations. MagicBands are now used by half of Disney's guests and more than 90% of the users report a positive experience.

"The Disney watch is an example of what other companies are doing with wearables to solve problems in the payments ecosystem," says Tom Trebilcock, vice president of digital for PNC Financial Services Group. "At Disney, they have to deal with people not wanting to take out their wallets or carry cash while they're at the park. I'm not suggesting financial institutions would do the same thing, but there is a way to make transactions more convenient."

MagicBand is a flavor of what's called wearable computing, or Web-enabled devices such as glasses, watches, bracelets, or wristbands that can be worn on the body. Though the technology is rudimentary at this point, it's expected to develop and grow fast, and can be used to access financial information, authenticate user identity and execute contactless payments.

"There's plenty for financial institutions to be doing today," says Mark Schwanhausser, director of omnichannel financial services for Javelin Strategy & Research. "For first movers, it's about buffing their image for innovation. But as a whole, this is a time for the financial services industry to develop the technology that banks will deploy in the future in multiple ways, one of which will be wearables."

PNC has not deployed a specific banking app for wearable computing, but is prepping for the technology's growth by developing uses for wearables through application programming interfaces, or APIs. APIs are programming tools that allow the design, function and interfaces of banking and payment apps to be easily configured to fit different computing devices, or form factors in tech-speak.

By using APIs, PNC can migrate a digital wallet, money transfer service or account alerts to watches, glasses or other wearable devices as they become more popular with consumers.

Trebilcock sees a particular opportunity to use wearable payment apps to execute contactless payments for small purchases, where taking out a wallet or mobile phone would be more inconvenient for consumers than for larger purchases that would typically require more time.

"It's the sort of payment where you would carry paper money or coins, to spend at a coffee shop or something like that, generally purchases under $30," he says.

Micropayments may not sound like a big deal, but enrolling consumers to make small payments is how PayPal made major inroads against banks more than a decade ago. And wearable payments also can be used to feed other banking functions, such as security and account management. "More banks need to try this stuff out," says Jacob Jegher, a senior analyst at Celent. "Banks should buy a few of them and test them out to see what works."

Some banks are already building wearable payments apps, but most are outside the United States. In Canada, RBC is testing a wristband that uses a consumer's heart rhythms to authenticate users. In Europe, CaixaBank and Barclays are testing bracelets that can execute contactless payments at merchants.

RBC is tying the consumer's heartbeat to a unique computing band, which reduces the identity burden for a user and enables faster access to accounts, mobile wallets and payments apps. A person could check into a store and use a stored credit card to make a payment simply by waving the band or watch near a payment terminal.

Used this way, the wearable is a "trusted device," which does not require full authentication for repeated use. "I can unlock my phone using a Bluetooth device that doesn't require a PIN. The same thing can be done with a smartwatch," Jegher says.

In the U.S., most of the wearable payments applications are being built by nonbanks, such as the mobile payments company LevelUp. MasterCard and PayPal also support a number of wearable computing applications.

U.S. Bancorp, a wearable computing pioneer that wound up dumping a wearable payments product after a pilot several years ago, is taking a fresh look at how the technology can be used for payments and other financial functions.

"It's still an early adoption technology, but there's no longer just one player," says Dominic Venturo, U.S. Bancorp's chief innovation officer, adding that new wearable devices from Pebble, Galaxy Gear and Intel provide a technology foundation that will result in more transaction apps for wearables in the near future.

U.S. Bancorp expects Apple Pay will shake up payments and, as a result, the company is experimenting with new technology such as augmented reality and voice commands. It is also once again testing wearables to see if they have gained more acceptance from consumers and merchants as a form of payment. Apple Pay, for example, will likely be a function available on Apple Watch, which is expected to hit the market in 2015.

"Using a band or wearable can be more convenient than taking a card out of your wallet," Venturo says.

But it's not a slam dunk. In 2011, before wearables were even called wearables, U.S. Bancorp tested a bracelet called Vitaband that could make payments, primarily for medical care. The pilot ended without the company adding it to its product mix.

"Back when we did the test, you had to tell the merchant that you were going to use contactless payments," Venturo says. "Some folks had a desire to have a medical ID, but it wasn't a logical extension to have payments. It wasn't the best marriage of different things. At the time, contactless was pretty small and not as ubiquitous as it is today."

That ubiquity, along with the proliferation and media buzz around wearable computing, suggest that wearable payments would perform better now.

So U.S. Bancorp is testing how different wearable devices can be used in and around point-of-sale terminals. It's also figuring out what other financial services, along with payments, should be included on wearable devices, such as account alerts, balance inquires or money transfers.

The company has built wearable apps for most of the technology that is commercially available, and is considering how they might be used at a point-of-sale terminal, an ATM or a self-service kiosk. There are challenges in terms of usability and interoperability, since most wearable computing devices rely on Bluetooth, not near-field communication, to communicate between devices. This makes the technology that supports wearable payments different than the technology that supports most mobile payment systems.

"There are pros and cons to this. A band is a convenient place to receive an alert or to view information or to tap a payment, but there are some challenges in interaction with wearable devices," Venturo says. "With a card or an NFC-enabled mobile phone, you can lean over near a terminal for a swipe if you're not close. A band or a watch is part of your arm. How much can you bend over to use it?"

While banks likely don't need to have wearable payments apps in the market right now, it's important to consider the technology's fit in the future, says Rick Oglesby, a senior analyst and consultant at Double Diamond Research.

"The big mover for wearables will be Apple Pay embedded in the Apple Watch," Oglesby says. "Since most banks are already participating in Apple Pay, they shouldn't need to do much else in the short run. It will be quite a while before consumers are using wearables to make purchases."

Banks do need a long-term strategy in regard to wearables, which will align heavily with banks' digital wallet strategies, Oglesby says. "Operating system owners will have a tremendous advantage in the digital wallet space, and wearables will only accentuate that advantage, so it makes sense for the banks to be partnering with the likes of Apple, Google and Amazon before a third party fills that gap on the bank's behalf."